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Download Full Brief OCTOBER 2005, NUMBER 35 WHY DO WOMEN CLAIM SOCIAL SECURITY BENEFITS SO EARLY? BY ALICIA H. MUNNELL AND MAURICIO SOTO* Introduction If individuals continue to withdraw completely from This brief summarizes the incentives facing older the labor force in their early 60s, a large and growing women when claiming their Social Security benefits. number will be hard pressed to maintain an adequate The analysis shows that single women and married standard of living throughout retirement. Economic women face very different choices. For most married and demographic pressures are gradually eroding key women, the Social Security benefit structure actually sources of retirement income at the same time that encourages them to grab their benefits as soon as pos- increases in life expectancy mean that people can sible. These incentives reinforce the tendency for expect to live for 20 years, on average, after they stop wives, who are usually younger, to retire when their working. And averages do not tell the whole story. husbands do. Early claiming may maximize the wife's Nearly one third of women and almost one fifth of Social Security "wealth," but it also encourages them men will live into their 90s. to stop working, creating a loss of earnings and 401(k) savings and extending the period over which they need Women's low wages, interrupted work histories, and support in retirement. role as caregivers make them especially vulnerable in old age. A solution to the income security challenge, Early Claiming of Social Security with a potentially enormous payoff, is for women to Benefits work longer. One important benefit of continued employment — in addition to increasing current income, allowing additional 401(k) contributions, and The existence of Social Security's Earliest Eligibility postponing the drawdown of savings — is avoiding the Age (EEA) means that most Americans have an impor- actuarial reduction, or enjoying the actuarial increase, tant choice to make once they turn age 62: claim in Social Security benefits. One would think that the reduced Social Security benefits right away or delay 1 higher benefits are particularly important for women, until some further date and receive a larger benefit. who on average have much longer life expectancy. The reductions are approximately fair for the person Unfortunately, women, even more than men, tend to with average life expectancy. Monthly benefits are claim Social Security benefits as soon as they become lowered by an amount that offsets the longer period for which they will be received.2 available. The question is why? * Alicia H. Munnell is the Peter F. Drucker Professor of Management Sciences in Boston College’s Carroll School of Management and Director of the Center for Retirement Research at Boston College. Mauricio Soto is a Senior Research Associate at the Center. The authors would like to thank Peter Diamond for helpful comments and Roberto Medina for explaining Social Security rules. The precise amount of the reduction for early retire- TABLE 2. MORE WOMEN THAN MEN CLAIM BENEFITS EARLY ment depends on when benefits are claimed relative to the "Normal Retirement Age” (NRA). The fact that Percent Distribution of Initial Social Security Benefit Awards the NRA is rising from 65 to 67 complicates the story. With an NRA of 65, a person who claimed benefits at Age Women Men age 62 received monthly benefits 20 percent lower than the full amount. The scheduled increase in the 62 58.6 53.3 NRA from age 65 to 67 raises the actuarial reduction 63 7.3 7.9 for claiming benefits at age 62 from 20 percent to 30 64 11.6 13.1 percent (see Table 1).3 At the same time, the Delayed 65 16.5 22.4 Retirement Credit, which has been increasing, now provides close to an actuarially fair adjustment for 66 and over 5.9 3.3 delaying retirement beyond the Normal Retirement Total 100.0 100.0 Age. Thus, on average, workers will receive the same lifetime benefits regardless of when they claim benefits Source: Authors’ calculations from the Social Security Annual between ages 62 and 70. In the following discussion, Statistical Supplement (2004). age 66 will be used as the Normal Retirement Age — the benchmark for full benefits. claiming the full benefit at age 66 and enjoying it over a longer life span.5 Thus, one would expect a smaller TABLE 1. SIZE OF MONTHLY CHECK DEPENDS ON WHEN percentage of women than men to claim benefits at age BENEFITS ARE CLAIMED 62 — just the opposite of the pattern shown in Table 2. Clearly other factors are at play. Benefits as a Percent of Worker’s Primary Insurance Amount Age Workers Retirement at The Claiming Behavior of Single Women 62 65 66 67 70 One way to sort out the puzzle is to look at the retire- 62 in 1999 80.0 100.0 106.5 113.0 132.5 ment patterns of men and women by marital status. This information comes from the Health and 62 in 2005-2016 75.0 93.3 100.0 108.0 132.0 Retirement Study (HRS), a nationally representative 62 in 2022 70.0 86.7 93.3 100.0 124.0 survey of older Americans.6 Table 3 reports the distri- bution of claiming ages for workers who claimed Source: Authors’ calculations from the Social Security Trustees Social Security benefits between 1992 and 2002. Report (2005). In 2003, 59 percent of women and 53 percent of men FIGURE 1. LONG-LIVED INDIVIDUALS RECEIVE GREATER opted to claim actuarially reduced benefits at age 62 LIFETIME BENEFITS BY DELAYING CLAIMING (see Table 2).4 The fact that a greater proportion of Present Discounted Value of Social Security Benefits for women than men claim benefits at this age is some- Different Life Expectancies* what surprising, since the women are expected to live longer than the men. A longer life expectancy means that women on average will receive benefits for an $200,000 Claims at 66 extended period of time, which makes the increase in $150,000 monthly benefits from postponing receipt more valu- Claims at 62 able (see Figure 1). That is, individuals with average $100,000 life expectancy of, say, 81 years will receive the same $50,000 lifetime benefits if they claim actuarially reduced bene- fits at 62 or full benefits four years later at 66. But $0 women at age 62 have a life expectancy that is about 62 66 70 74 78 82 86 90 94 98 three years longer than that for men. Therefore, more Expected Age of Death women than men are likely to live beyond the "break- Source: Authors’ calculations. even age" and would gain from postponing retirement past age 62. In other words, women can make up for *The calculations assume a PIA of $10,000 and a 3 percent real foregoing actuarially reduced benefits at ages 62-65 by discount rate. 2 These three different types of benefits are shown in TABLE 3. SINGLE WOMEN CLAIM LATER THAN MEN Figure 2 for a woman whose unreduced Social Percent Distribution of Initial Claiming of Social Security Security benefit equals 40 percent of her husband's. Benefits, 1992-2002 This example assumes that she and her husband are the same age, her husband will claim benefits at 65, she Age Women Men will live to 90, and he will die at 80. The wife can Married Single Married Single claim benefits from her own earnings history starting at age 62, although this will cause a permanent reduc- 62 67.1 48.9 58.1 64.1 tion in her own benefits. Once her husband retires, she 63 14.5 14.7 11.9 10.4 will be eligible for the 50 percent of her husband's benefit, which is reduced to reflect her early claim of 64 6.6 9.2 9.6 7.1 benefits. Once her husband dies, she will be entitled to 65 9.8 20.6 15.8 11.7 a survivor's benefit, which is mainly the continuation of her deceased husband's benefit. 66 and over 2.0 6.5 4.7 6.7 Two interesting insights emerge from the stylized pro- Total 100.0 100.0 100.0 100.0 file presented in Figure 2.7 First, from the wife's per- Source: Authors’ calculations from the Health and Retirement Study. spective, her decision as to when to claim does not affect the survivor's benefit. The survivor’s benefit is For single women, the pattern is as predicted. A sig- solely determined by her husband's earnings history nificantly smaller percentage of single women claim and the actuarial reduction or increase to reflect his benefits early than either married or single men. That early or delayed claiming. That is, from her perspec- makes sense. Women on average live longer than the tive, the survivor's benefit is a fixed amount to be "break-even" age, which means that they will enjoy the received after her husband's death. In order to maxi- higher benefits they gain from postponing retirement mize that fixed annual amount, she would like him to for enough additional years to more than make up for delay claiming. If the husband is trying to maximize foregoing benefits from ages 62-64. Thus, it is per- the benefits received by the couple, delay is also his fectly sensible that single women are less likely than choice. Ironically, in this example, when the husband men to claim benefits early. is deciding when to claim benefits, it is his wife's life expectancy, rather than his own, that is the determining The Claiming Behavior of Married consideration.
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